A Guide to Mutual Funds and ETFs

An mutual fund and exchange-traded fund (ETFs) both were created from the same basic concept of pooled stock investing, often following a passive, index-oriented strategy which attempts to follow or mirror representative index benchmarks. Mutual funds often have more complex structural structure than ETFs, with differing share classes, minimum withdrawal rates, and additional fees. Another potential disadvantage is that ETFs are usually less liquid than mutual funds; thus, in a sharp market reversal, ETFs often trade lower as prices rise. If you choose an ETF rather than a mutual fund, you will likely be forced into an auction position if the market moves against you. For this reason, most professional investors avoid ETFs altogether.

The similarities and differences between ETFs and mutual funds are largely a result of similarities and differences in active management. In active management, an investor usually buys and sells stocks as part of a larger strategy. An ETF does not have the same type of active management.

Similar to other forms of investment, actively managed funds and ETFs tend to follow a certain path over time, experiencing increases and decreases in price as certain factors affect the price. Because ETFs are sold as securities, they must follow the same regulations and accounting procedures as other types of securities. In addition, ETFs are usually required to file a regular report with the SEC detailing their investments. As with mutual funds, ETFs will have typical expense ratios and distribution costs. Because of these similarities, most professional investors typically advise against the purchase of ETFs unless you have experienced firsthand the benefits or the risks of such an investment.